VAT for Charities

Introduction

Charities face unique VAT rules that differ from typical businesses. While charities don't automatically get exemption from VAT, they can access specific zero-ratings, reduced rates, and special refund schemes. Understanding these rules is essential to maximise the financial benefit to your charitable activities and avoid unnecessary VAT costs.

What makes a charity for VAT purposes

To claim charity VAT reliefs in the UK, your organisation must meet specific requirements. Your charity must be:

• Based in the UK
• Established for charitable purposes only
• Registered with the Charity Commission or corresponding regulator, where required
• Run by 'fit and proper persons'
• Recognised by HMRC

Simply being a non-profit organisation doesn't automatically give you charitable status for VAT purposes. If your charity isn't currently recognised by HMRC, you can apply for recognition online. You'll need to quote your HMRC recognition reference when claiming VAT reliefs.

When charities need to register for VAT

Your charity must register for VAT if your taxable sales exceed the VAT registration threshold. Taxable sales are business transactions liable to VAT at the standard rate (20%), reduced rate (5%), or zero rate (0%). Many charities make taxable sales, and registration is not optional if you exceed the threshold – there are penalties if you fail to register on time.

If your charity's income from taxable sales falls below the VAT registration threshold, you can register voluntarily but you're not required to. However, if your charity makes no taxable sales – either because you have no business activities or because all your sales are exempt from VAT – you cannot register for VAT.

Primary purpose trading vs non-primary purpose trading

Charity law allows charities to carry out trading activities directly when these activities support their primary purpose. For example, a care charity providing residential accommodation for payment, or an art gallery charging admission fees. This is called 'primary purpose trading'.

When charities want to undertake 'non-primary purpose trading' on a significant scale – such as selling Christmas cards to raise funds – they must establish subsidiary trading companies. These trading companies are controlled by the charity but aren't themselves charities. Most VAT reliefs available to charities don't apply to these subsidiary companies.

If a charity and its trading subsidiaries are VAT registered, they may register as a VAT group under certain conditions.

Zero-rating and reduced rates for charities

Charities can access several zero-rating and reduced-rate reliefs when purchasing goods and services:

Zero-rated supplies include:

• Talking books and wireless sets for the blind
• The first grant of a major interest in, and construction of, buildings used solely for a relevant charitable purpose
• Sea rescue equipment and its repair and maintenance
• Aids for disabled people
• Certain goods and services supplied to charities under specific conditions

Reduced-rate supplies include:

• Fuel and power for buildings used by charities for non-business purposes (charged at the reduced rate of 5%)

Zero-rated advertising services for charities

When third parties supply advertising services to charities, these can be zero-rated. This relief covers all types of advertisements on any subject, including staff recruitment. The charity's name or logo doesn't need to appear in the advertisement for the relief to apply.

Media covered by zero-rating includes:

• Television, radio, and cinema
• Billboards and the sides of vehicles
• Newspapers and printed publications
• Digital mediums (with some restrictions)
• Space sold for advertising on other items like beer mats, calendars, and clothing

What doesn't qualify:

Direct mail and telesales don't qualify for zero-rating because they target selected individuals or groups rather than the general public. This includes mail sent by post, fax, or email to specific addresses.

Advertisements on a charity's own website don't qualify for zero-rating, as this isn't a supply of someone else's time or space.

Some digital advertising can be zero-rated if it meets all other conditions, including audience targeting, behavioural targeting, channel targeting, content targeting, daypart targeting, demographic targeting, device targeting, and direct placement. However, email advertisements, natural hits, and social media accounts remain standard-rated.

Exempt supplies by charities

Certain activities by charities are exempt from VAT:

• Supply of welfare services by a charity
• Supply of goods and services in connection with spiritual welfare services
• Fundraising events held by charities (subject to specific conditions)

Special VAT refund schemes for qualifying charities

Some charities can reclaim VAT on purchases for their non-business activities – something that wouldn't normally be possible. This applies to qualifying charities under sections 33C and 33D of the VAT Act 1994.

Qualifying charities include:

Palliative care charities – charities whose main purpose is providing palliative care under medical supervision to persons with terminal illness (mainly adult and children's hospices). This category doesn't include charities that merely support palliative care charities.

Air ambulance charities – charities whose main purpose is providing emergency medical air ambulance services arranged or requested by NHS ambulance service bodies. This doesn't include support or fundraising charities.

Search and rescue charities – either charities whose main purpose is carrying out co-ordinated search and rescue of persons at risk of death or serious injury (such as lifeboat crews, mountain rescue teams, cave rescue teams, lowland search and rescue teams), or charities whose main purpose is to support, develop and promote such charities.

Medical courier charities – either charities whose main purpose is providing urgent transportation of medical items (blood, platelets, samples, drugs, patient notes, small medical instruments, donor breast milk, and medical supplies), or charities whose main purpose is to support, develop and promote such charities (mainly 'blood bike' charities).

Qualifying charities can claim a refund of VAT incurred on most goods and services supplied to them on or after 1 April 2015 that relate to their non-business activities.

Zero-rated printed matter and collection boxes

Under extra-statutory concession, certain items supplied to charities can be zero-rated:

• Charity appeal letters and envelopes
• Charity collection boxes
• Stickers and emblems used as charity lapel badges
• Certain printed matter supplied to charities

Suppliers can apply the 'package test' for printed matter to charities' direct mailing materials, meaning individual elements of a postal package can still be zero-rated under the concession even if the overall service is standard-rated.

Sources

• How VAT affects charities (VAT Notice 701/1)
• VAT Refund Scheme for charities (VAT Notice 1001)
• Goods or services supplied to charities (VAT Notice 701/58)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.